It's time to review your purchase orders and other standard form contracts.

From 12 November 2016, the unfair contract term protections in the Australian Consumer Law (ACL) and the Australian Securities and Investments Commission Act 2001 (Cth) (ASIC Act) will extend to small businesses, regardless of whether the small business is an acquirer (customer) or a supplier. This will result in a range of standard form contracts routinely used by companies in the energy and resources industry now falling under the unfair contract term protections regime of the ACL.

The Treasury Legislation Amendment (Small Business and Unfair Contract Terms) Act 2015 will protect businesses against unfair terms in standard form contracts provided that:

  • the contract is for the supply of goods, services or a sale or grant of an interest in land (including, potentially, mining tenements);
  • at the time the contract was entered into, the business seeking protection from the regime employed fewer than 20 persons (on a headcount basis and excluding any contractors or subcontractors); and
  • the “upfront price” payable under the contract is not more than $300,000 (or $1,000,000 if the duration of the contract is more than 12 months), noting that the “upfront price” is the consideration that is provided or is to be provided under the contract and does not include any consideration that is contingent on the occurrence or non-occurrence of a particular event (e.g. amounts payable in the event an option is exercised by one party, or in the event of a default etc).

The new provisions will apply to all small business contracts that are:

  • entered into on, or after, 12 November 2016;
  • renewed on, or after 12 November 2016, in which case the protections will apply to the entire contract as renewed; or
  • varied on or after 12 November 2016, in which case the protections will apply to the varied terms.

A term of a small business contract will be void if:

  • the term is unfair; and
  • the contract is a standard form contract.

A term in a small business contract will be unfair if all of the following tests are met:

  • the term would cause a significant imbalance in the parties’ rights and obligations under the standard form contract; and
  • the term is not reasonably necessary to protect the legitimate interests of the party who would be advantaged by the term (there is a rebuttable presumption that the term is not reasonably necessary to protect those interests unless that party can prove otherwise); and
  • the term would cause detriment, whether financial or non-financial, to a party to the contract if the term was to be applied or relied on.

Terms that could potentially fall foul of these tests include terms that:

  • allow a business to vary the contract without the consent of the counterparty;
  • unfairly restrict a right to terminate the contract;
  • suspend or terminate the services as of right; and
  • impose unreasonable liability and indemnification obligations.

As the 12 November 2016 commencement date approaches, businesses should review their standard form contracts to ensure that they are in compliance with this new regime, noting that businesses that seek to include, apply or rely on unfair terms in small business contracts not only face reputation risks but also compensatory claims under the existing enforcement regimes in the ACL and the ASIC Act.